Brooks Macdonald faced with the prospect of increased volatility

Brooks Macdonald (BRK) delivered a creditable half-year performance, boosting funds under management (FuM) by 5.3 per cent to £17.3bn, with the core UK discretionary business registering annualised net flows of 6.3 per cent. That came on the back of “sustained positive net flows” in the Bespoke Portfolio Service, along with strengthening numbers at Brooks Macdonald Investment Solutions,its business focusing on financial advisers. Net flows through the period reached £326mn, turning positive after a £367mn outflow recorded in the second half of 2020.

It’s worth remembering that the investment manager must have devoted a portion of the last two years reassuring panicked clients over long-term investment prospects. One suspects that insecurities are set to intensify as this year progresses, with negative real investment returns in prospect, set against an increase in the risk-free rate of return. Chief executive, Andrew Shepherd, made mention of the “human tragedy unfolding in Ukraine”, but the challenge for Brooks Macdonald will be how to preserve and grow wealth as more than a decade of loose monetary policy unwinds. The good news is that although some investors have been scrambling to secure safe-haven assets, the disruption (or realignment) of global trade patterns will eventually give way to new investment opportunities.

The group delivered a positive investment return of 3.3 per cent for the period under review, with risk adjusted returns for clients performing well set against the relevant PIMFA and ARC benchmarks. In terms of the top-line, growth was aided by a complete half year contribution from Lloyds Banking Group’s Channel Islands funds and wealth management business, which was acquired at the end of 2020. A rise in fee income was offset by a reduction in transactional income of £1.9mn, a reflection of “relatively stable asset allocation during the period”. One would be justified in asking whether stability will be a feature of the asset allocation process through the remainder of FY 2022.

From an operational perspective, progress has been made towards the migration of adviser- and client-facing processes to the SS&C/Hubwise platform, while some back-office processes have been outsourced. Bosses cite the ongoing digital transformation, along with the focus on quality M&A, as key drivers of FuM growth and profitability. Near-term, however, Brooks Macdonald will be forced to contend with increased market volatility and the prospect of stagflation. The former isn't necessarily a wholly negative dynamic for wealth managers, but it is difficult to justify our buy call, even with the shares trading at an undemanding 14 times Panmure Gordon’s estimate for forward adjusted earnings. Hold.

Last IC view: Buy, 2,386p, 16 Sep 2021